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Guarantees
To guarantee a debt is to accept responsibility for paying a debt if the person, company or corporation that incurred the debt fails to do so. There are a number of different types of guarantees with which credit professionals typically work. One of the more common guarantees is the Personal Guarantee. A personal guarantee often occurs when a business owner guarantees the debts incurred by the corporation they own or manage. It means nothing less than that the guarantor is at risk. By signing a guarantee, the guarantor has personal liability meaning they have 'skin in the game" and a reason to help push the debtor for payment.
Occasionally, a creditor must demand payment against a personal guaranty (a PG). Here is an example of a demand against a PG:
Date
Guarantor Name and Address
Dear :
Our records indicate that on DATE you signed a Personal Guaranty under which you agreed to become liable for the debts of NAME OF DEBTOR COMPANY. A copy of that Guaranty is attached.
Unfortunately, NAME OF DEBTOR COMPANY owes $______ at this time. This balance is between X and Y days past due. A copy of the account statement is attached. NAME OF DEBTOR COMPANY has been unable to provide us with an acceptable payment commitment. Therefore, we have no choice but to seek payment from you as the guarantor. Please remit payment in the amount of $_____ and send that payment to the address below no later than DATE.
If you have any question, please contact me at xxx-xxx-xxxx.
Thank you
Sincerely,
Name
Signature
Title
Encl.
Inter-corporate guarantees are also widely used. An inter-corporate guarantee involves the pledge by one company to be responsible for the debts of another company. Inter-corporate guarantees are popular when a trade creditor is asked to extend credit to a marginal company that is the subsidiary of a creditworthy parent company. In this scenario, the credit manager may seek to bolster the creditworthiness of the subsidiary by obtaining an inter-corporate guarantee from the parent company.
As a condition for extending open account terms, some creditors require guarantees. In order to have some assurance of payment under a personal guarantee, the creditor must know if the guarantor has the resources to pay them if the company defaults. Occasionally, a guarantor will decide to revoke their guarantee. When this occurs, the creditor must carefully re-evaluate the credit risk. If the risk of loss proves to be too high, the creditor will have no choice but to reduce or withdraw the debtor company’s open account terms.
Edited by Michael C. Dennis. Mr. Dennis is a consultant and the author of "Credit and Collection Handbook." He can be reached by email at mcdennis13@yahoo.com